How to pay less tax and build wealth tip #1

By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances!

So how do you change your thinking so that you can use your prefrontal cortex to help you reduce income taxes and reduce fear fight flight and emotional responses to the stress of your taxes?

The only way is to change habits of avoiding confronting taxes and work with a proactive tax CPA who understands the opportunities for tax savings and how to avoid landmines!

We are a Phoenix CPA firm with tax specialization and clients all over the U.S.

We do not understand why so many business owners pay too much in income taxes when it isn’t necessary!

The reason we decided to stay away from government, non-profit and financial statement audits (we specialize in IRS audits) is because you cannot be good at everything! We turn down work that will take our focus away from building up wealth by reducing taxes and avoiding running out of money in retirement years.

My recommendation is to use a journal and to write down questions and listen to your answers as you read them aloud. We help clients understand taxes in layman’s language. We help them understand the importance and the need to make taxes a priority not just once a year but continuously throughout the year.

Saving taxes is an investment that has a learning curve. The way to increase your chances of mastering what you need to do to reduce taxes is by writing in your journal: “I promise to work on learning something new this week that will reduce my taxes”. “Rome wasn’t built overnight and with my CPA I will master what I need to know”.

Many people have a problem doing this kind of journaling but is very very powerful and it does work because it builds new neural networks in your brain which will help you be smarter in the future.

One of the tax laws of nature is that if your business is on a cash basis you need to regularly compare the taxable income of your business to your cash position. The taxable income needs to be less than 100% of your cash position.

Most business owners do not understand the extreme negative impact of using cash that emanated from operations to be use for non-taxable type personal expenses.

For example if John has very little cash reserves personally and has not taken the time to build up his liquidity and get a line of credit from the bank, there will be warning signs that he may have a problem by the end of year.

John will need to start saving cash from each years profits and hire a proactive CPA.

In addition, John’s wife Mary needs to stop taking out only 7% in federal withholding when their federal marginal tax bracket is 39%!!

For example if Mary makes $50,000 per year, and only takes out 7% in federal holding only $3500 will be withheld. Mary should be taking out close to $19,500 per year for Federal withholding!!

In addition, the personal spending needs to be examined and reduced so that there will be adequate cash reserves in case of an emergency and to help prepay expenses to reduce personal income taxes.

Most business owners like John do not understand why they don’t have any cash but have a lot of taxable income. The most valuable tool that I use for 40 years is the statement of Cash flows. This statement uses the balance sheet to analyze why there is more taxable income than cash

For example on May 1, 2014, John’s cash basis business has $100,000 of cash but has $250,000 of taxable income. What are a few of the reasons for this big gap?

What I discovered from new clients is that their previous CPA never help them understand how taxes work and why the business owner needs to focus on the taxable income versus cash gap.

John needs to understand with the help of a proactive CPA why there is such a big gap between what is in the bank and what is taxable income.

Here are a few of the possibilities.

John used $80,000 of cash out of this year’s cash that came from current operations to pay the retirement plan contribution for 2013. Cash decreased by $80,000 without taxable income for 2014 year going down one cent.

Also John in previous years took out $75,000 to remodel is home. Although cash went down $75,000, taxable income in the previous year did not go down at all. This resulted in a $75,000 taxable income to cash gap!

Also John paid out cash of $10,000 life insurance premiums out of his business but taxable income did not go down one penny.

In addition John enjoys going out to sporting events and meals with potential and current clients. Business purpose Meals and entertainment are only 50% tax deductible. So cash went down by say $1000 but Taxable income only went down by $500. This assumes that John has the proper written documentation should IRS audit and scrutinize the meals entertainment deduction.

I know of a secret that will result in 100% tax deduction.

In addition, in December 2013, John decided to buy a big SUV for
$55, 000.
John financed the vehicle and began making annual payments of $20,000. $2000 is interest, $18,000 is principal. So although cash went down by $20,000 in 2014, Taxable Income only went down $2000 because of the interest deduction. There is significant cash to tax gap. In 2013 when John was able to get a big tax deduction for the purchase of the SUV, he noticed he had to pay very little tax due to this big tax deduction but had a lot of cash left so he took that cash as a personal draw. The negative taxable income to cash gap deteriorated because John’s business is going to have to pay for the nondeductible loan payments for years to come without getting a tax deduction except a minor amount of interest and interest expense

However, if John understood the way taxes work by utilizing a proactive CPA, it would’ve been a different story.

By using the prefrontal cortex and learning new healthy tax reduction habits including the proper tax planning. John will save significant tax dollars for 2014. I have seen clients master these new habits! You will master them too!

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com